##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 1-10877
 TERRA NITROGEN COMPANY, L.P.
  Delaware
    
    73-1389684(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)Terra CentrePO Box 6000, 600 Fourth StreetSioux City, Iowa
    
    51102-6000(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number:
(712) 277-1340
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  þ Yes o No
 Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
 o Large accelerated filer
    
    þ Accelerated filer
    
    o Non-accelerated filer(Do not check if a smaller reporting company)
    
    o Smaller reporting company
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
 At the close of business on April 25, 2008 there were 18,501,576 Common Units.




---



##### 



TABLE OF CONTENTS
 Part I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Consolidated Statements of Partners Capital
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22Exhibit 31.1Exhibit 31.2Exhibit 32




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED BALANCE SHEETS
  unaudited
 March 31,
    
    
    December 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    248,780
    
    
    $
    246,140
    
    
    $
    99,820Demand deposits with affiliate
    
    
    1,012
    
    
    
    3⁄4
    
    
    
    3⁄4Accounts receivable
    
    
    28,267
    
    
    
    49,635
    
    
    
    36,009Inventory
    
    
    38,833
    
    
    
    19,343
    
    
    
    33,665Prepaid expenses and other current assets
    
    
    16,338
    
    
    
    4,906
    
    
    
    5,275Total current assets
    
    
    333,230
    
    
    
    320,024
    
    
    
    174,769Property, plant and equipment, net
    
    
    69,698
    
    
    
    71,289
    
    
    
    73,234Other assets
    
    
    19,157
    
    
    
    22,473
    
    
    
    14,408Total assets
    
    $
    422,085
    
    
    $
    413,786
    
    
    $
    262,411LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    43,758
    
    
    $
    49,825
    
    
    $
    38,048Customer prepayments
    
    
    154,058
    
    
    
    154,644
    
    
    
    56,586Total current liabilities
    
    
    197,816
    
    
    
    204,469
    
    
    
    94,634Other long-term liabilities
    
    
    436
    
    
    
    2,218
    
    
    
    495Total liabilities
    
    
    198,252
    
    
    
    206,687
    
    
    
    95,129Partners capital:Limited partners interests, 18,502 Common Units
and 184 Class B Common Units authorized and
outstanding
    
    
    212,075
    
    
    
    221,726
    
    
    
    177,640General partners interest
    
    
    (2,693
    )
    
    
    (9,928
    )
    
    
    (10,371
    )Accumulated other comprehensive income (loss)
    
    
    14,451
    
    
    
    (4,699
    )
    
    
    13Total partners capital
    
    
    223,833
    
    
    
    207,099
    
    
    
    167,282Total liabilities and partners capital
    
    $
    422,085
    
    
    $
    413,786
    
    
    $
    262,411
   3




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  (unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Revenues
    
    $
    174,253
    
    
    $
    127,852Other
    
    
    279
    
    
    
    305Total revenues
    
    
    174,532
    
    
    
    128,157Cost of goods sold
    
    
    91,971
    
    
    
    90,770Gross profit
    
    
    82,561
    
    
    
    37,387Operating expenses
    
    
    3,524
    
    
    
    3,178Operating income
    
    
    79,037
    
    
    
    34,209Interest expense
    
    
    (81
    )
    
    
    (112
    )Interest income
    
    
    2,640
    
    
    
    1,233Net income
    
    $
    81,596
    
    
    $
    35,330Net income allocable to
Common Units
    
    $
    72,704
    
    
    $
    34,624Net income per Common Unit
    
    $
    3.93
    
    
    $
    1.87
   4




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  (unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Operating activities:Net income
    
    $
    81,596
    
    
    $
    35,330Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    5,745
    
    
    
    3,808Non-cash gain on derivative instruments
    
    
    (301
    )
    
    
    (1,633
    )Changes in operating assets and liabilities:Receivables
    
    
    21,368
    
    
    
    1,667Inventories
    
    
    (19,490
    )
    
    
    (10,956
    )Accounts payable and customer prepayments
    
    
    3,647
    
    
    
    19,334Other assets and liabilities
    
    
    (3,955
    )
    
    
    7,222Net cash flows from operating activities
    
    
    88,610
    
    
    
    54,772Investing activities:Capital expenditures
    
    
    (903
    )
    
    
    (1,331
    )Plant turnaround expenditures
    
    
    (43
    )
    
    
    (53
    )Change in demand deposits with affiliate
    
    
    (1,012
    )
    
    
    2,457Net cash flows from investing activities
    
    
    (1,958
    )
    
    
    1,073Financing activities:Partnership distributions paid
    
    
    (84,012
    )
    
    
    (18,312
    )Net cash flows used in financing activities
    
    
    (84,012
    )
    
    
    (18,312
    )Net increase in cash and cash equivalents
    
    
    2,640
    
    
    
    37,533Cash and cash equivalents at beginning of year
    
    
    246,140
    
    
    
    62,287Cash and cash equivalents at end of period
    
    $
    248,780
    
    
    $
    99,820Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    63
    
    
    $
    63
   5




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
  (unaudited)
 AccumulatedClass B
    
    
    General
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Units
    
    
    Units
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2008
    
    $
    221,153
    
    
    $
    573
    
    
    $
    (9,928
    )
    
    $
    (4,699
    )
    
    $
    207,099Net income
    
    
    72,704
    
    
    
    796
    
    
    
    8,096
    
    
    
    3⁄4
    
    
    
    81,596
    
    
    $
    81,596Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    19,150
    
    
    
    19,150
    
    
    
    19,150Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    100,746Distributions
    
    
    (82,332
    )
    
    
    (819
    )
    
    
    (861
    )
    
    
    3⁄4
    
    
    
    (84,012
    )Partners capital at March 31, 2008
    
    $
    211,525
    
    
    $
    550
    
    
    $
    (2,693
    )
    
    $
    14,451
    
    
    $
    223,833Limited partner units issued and
outstanding March 31, 2008:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at March 31, 2008
    
    
    
    
    
    
    
    
    
    
    18,685,648
 AccumulatedClass B
    
    
    General
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Units
    
    
    Units
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2007
    
    $
    160,837
    
    
    $
    (41
    )
    
    $
    (10,545
    )
    
    $
    (6,179
    )
    
    $
    144,072Net income
    
    
    34,624
    
    
    
    344
    
    
    
    362
    
    
    
    3⁄4
    
    
    
    35,330
    
    
    $
    35,330Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    6,192
    
    
    
    6,192
    
    
    
    6,192Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    41,522Distributions
    
    
    (17,945
    )
    
    
    (179
    )
    
    
    (188
    )
    
    
    3⁄4
    
    
    
    (18,312
    )Partners capital at March 31, 2007
    
    $
    177,516
    
    
    $
    124
    
    
    $
    (10,371
    )
    
    $
    13
    
    
    $
    167,282Limited partner units issued and
outstanding at March 31, 2007:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at March 31, 2007
    
    
    
    
    
    
    
    
    
    
    18,685,648
   6




---



##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 Notes to Consolidated Financial Statements (Unaudited)
 1.
    
    Financial Statement PresentationBasis of PresentationThe condensed consolidated financial statements contained herein should be read in conjunction
with the consolidated financial statements and notes thereto contained in the Terra Nitrogen
Company, L.P. (TNCLP, our, we, or us) Annual Report on Form 10-K for the year ended
December 31, 2007. TNCLP and its operating partnership subsidiary, Terra Nitrogen, Limited
Partnership (the Operating Partnership), are referred to herein, collectively, as the
Partnership.The accompanying unaudited condensed consolidated financial statements reflect all adjustments,
which are, in the opinion of management, necessary for the fair statement of the results for
the periods presented. All of these adjustments are of a normal and recurring nature. Results
for the quarter are not necessarily indicative of our future financial results.Derivatives and Financial InstrumentsWe account for derivatives in accordance with Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,which requires
that derivatives be reported on the balance sheet at fair value and, if the derivative is not
designated as a hedging instrument, changes in fair value must be recognized in earnings in the
period of change. If the derivative is designated as a hedge and to the extent such hedge is
determined effective, changes in fair value are reported as a component of accumulated other
comprehensive income (loss) in the period of change, and subsequently recognized in the
determination of net income in the period that the offsetting hedged transaction occurs.Terra Industries Inc. and its subsidiaries (Terra) enter into derivative instruments with
counterparties for our operations. When Terra enters into a derivative instrument for our
operations, we simultaneously enter into a derivative instrument with Terra as the
counterparty. The terms of the derivative instruments between us and Terra are identical to the
terms of the derivative instruments between Terra and Terras counterparty. The types of
derivative instruments entered into include swap and basis swap agreements and put and call
options to cap or fix prices for a portion of our natural gas production requirements. Terra
may also enter into similar derivative instruments to fix or set floor prices for a portion of
our nitrogen sales volumes.Revenue RecognitionRevenue is recognized when persuasive evidence of a transaction exists, delivery has occurred,
the price is fixed or determinable, no obligations remain and collectibility is probable. We
classify any discounts and trade allowances as a reduction in revenue. Gains or losses
associated with settled nitrogen derivative contracts are classified as revenue. We classify
amounts directly or indirectly billed to our customers for shipping and handling as revenue.
  7




---



##### Table of Contents



Cost of Goods SoldThe cost of manufacturing fertilizer products is recorded when the fertilizer products are sold
and revenue is recognized. We classify amounts directly or indirectly billed for delivery of
products to its customers or its terminals as cost of goods sold. Premiums paid for option
contracts are deferred and recognized in cost of goods sold in the month to which the related
derivative transactions are settled. Realized gains and losses on derivatives activities are
recognized in cost of goods sold.InventoriesInventories are stated at the lower of average cost or estimated net realizable value. We
perform a monthly analysis of our inventory balances to determine if the carrying amount of
inventories exceeds its net realizable value. The analysis of estimated realizable value is
based on customer orders, market trends and historical pricing. If the carrying amount exceeds
the estimated net realizable value, the carrying amount is reduced to the estimated net
realizable value.Production costs include the cost of direct labor and materials, depreciation and amortization,
and overhead costs related to manufacturing activities. The cost of inventories is determined
using the first-in, first-out method.We estimate a reserve for obsolescence and excess of our materials and supplies inventory.
Inventory is stated net of the reserve.Impairment of Long-Lived AssetsWe review our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the sum of the
undiscounted future cash flows expected to result from the use of the asset is less than the
carrying amount of the asset, an impairment loss is recognized based on the difference between
the carrying amount and the fair value of the asset.Natural Gas Swaps, Options and Basis SwapsThe estimated fair value of each class of derivatives is based on published referenced prices
and quoted market prices from brokers.Cash and Cash EquivalentsWe classify cash and short-term investments with an original maturity of three months or less
as cash and cash equivalents. Demand deposits with affiliate are not classified in cash and
cash equivalents.Demand Deposits with AffiliateOur cash receipts are generally received by Terra. Cash receipts, net of cash payments made by
Terra, are transferred to us from Terra on a weekly basis. As a result of this cash collection
and distribution arrangement, Terra is a creditor to us.
  8




---



##### Table of Contents



Use of Estimates in Preparation of the Financial StatementsThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.2.
    
    Agreement of Limited PartnershipWe make quarterly distributions to our partners based on available cash for the quarter as
defined in our Agreement of Limited Partnership. Available Cash is defined generally as all
cash receipts less all cash disbursements, adjusted for changes in certain reserves established
as the General Partner determines in its reasonable discretion to be necessary. We paid
distributions of $84.0 million to our partners in the first quarter of 2008 and $18.3 million
for the same period in 2007.We receive 99% of the Available Cash from Terra Nitrogen, Limited Partnership (the Operating
Partnership) and 1% is distributed to its General Partner. Cash distributions from the
Operating Partnership generally represent our Available Cash from operations. Our cash
distributions are made 99.975% to Common Unitholders and 0.025% to our General Partner except
when cumulative distributions of Available Cash exceed specified target levels above the
Minimum Quarterly Distributions (MQD) of $0.605 per unit. Under such circumstances, our
General Partner is entitled, as an incentive, to larger percentage interests.On April 24, 2008, we announced a $4.20 distribution to be paid to Common Unit holders in the
2008 second quarter. We have exceeded the cumulative MQD amounts and will distribute the
Available Cash as summarized in following table:
 Income and Distribution AllocationClass BTarget
    
    
    Target
    
    
    Common
    
    
    Common
    
    
    GeneralLimit
    
    
    Increment
    
    

Units
    
    
    Units
    
    
    Partner
    
    
    TotalMinimum Quarterly Distribution
    
    $
    0.605
    
    
    
    0.605
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %First Target
    
    
    0.715
    
    
    
    0.110
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %Second Target
    
    
    0.825
    
    
    
    0.110
    
    
    
    85.859
    %
    
    
    0.985
    %
    
    
    13.156
    %
    
    
    100.000
    %Third Target
    
    
    1.045
    
    
    
    0.220
    
    
    
    75.758
    %
    
    
    0.985
    %
    
    
    23.257
    %
    
    
    100.000
    %Final Target and Beyond
    
    $
    1.045
    
    
    
    3⁄4
    
    
    
    50.505
    %
    
    
    0.985
    %
    
    
    48.510
    %
    
    
    100.000
    %
 The General Partner is required to remit the majority of cash distributions it receives from
the Partnership in excess of its 1% Partnership equity interest to an affiliated company.At March 31, 2008, the General Partner and its affiliates owned 75.3% of our outstanding units.
When less than 25% of the issued and outstanding units are held by non-affiliates of the
General Partner, we, at the General Partners sole discretion, may call, or assign to the
General Partner or its affiliates, our right to acquire all such outstanding units held by
non-affiliated persons. If the General Partner elects
to acquire all outstanding units, we are required to give at least 30 but not more than 60
days notice of its decision to purchase the outstanding units. The purchase price per unit
will be the greater of 1) the average of the previous 20 trading days closing prices as of the
date five days before the purchase is announced and 2) the highest price paid by the General
Partner or any of its affiliates for any unit within the 90 days preceding the date the
purchase is announced. Additional purchases of common units by the General Partner may be
restricted under the terms of Terras bank credit agreement as described therein.
  9




---



##### Table of Contents



3.
    
    Net Income per Limited Partnership UnitBasic and diluted income per unit is based on the weighted-average number of Common Units
outstanding during the period. The following table provides a reconciliation for basic and
diluted income per unit for the three-month periods ended March 31, 2008 and 2007:
 Three Months EndedMarch 31,(in thousands, except per-unit amounts)
    
    2008
    
    
    2007Basic income per Common Unit:Net income allocable to Common Unit class
    
    $
    72,704
    
    
    $
    34,624Weighted average units outstanding
    
    
    18,502
    
    
    
    18,502Net income per Common Unit
    
    $
    3.93
    
    
    $
    1.87
 There were no dilutive Common Units outstanding for the three-month periods ended March 31,
2008 and 2007.4.
    
    InventoriesInventories consisted of the following:
 March 31,
    
    
    December 31,
    
    
    March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    2007Materials and supplies
    
    $
    8,405
    
    
    $
    8,231
    
    
    $
    8,820Finished goods
    
    
    30,428
    
    
    
    11,112
    
    
    
    24,845Total
    
    $
    38,833
    
    
    $
    19,343
    
    
    $
    33,665
 Inventory is valued at actual first in, first out cost. Costs include raw material, labor and
overhead.5.
    
    Derivative Financial InstrumentsWe manage risk using derivative financial instruments for changes in natural gas supply prices
and changes in nitrogen prices. Derivative financial instruments have credit risk and market
risk.Terra enters into derivative instruments with counterparties for our operations. When Terra
enters into a derivative instrument for our operations, we simultaneously enter into a
derivative instrument
with Terra as the counterparty. The terms of the derivative instruments between us and Terra
are identical to the terms of the derivative instruments between Terra and Terras
counterparty.
  10




---



##### Table of Contents



We classify a derivative financial instrument as a hedge if all of the following conditions are
met:
 1.
    
    The item to be hedged must expose us to currency or price risk.2.
    
    It must be probable that the results of the hedge position substantially offset
the effects of currency or price changes on the hedged item (e.g., there is a high
correlation between the hedge position and changes in market value of the hedge item).3.
    
    The derivative financial instrument must be designated as a hedge of the item
at the inception of the hedge.
 Natural gas supplies to meet production requirements at our production facilities are purchased
at market prices. Natural gas market prices are volatile and we effectively hedge a portion of
our natural gas production requirements and inventory through the use of swaps, basis swaps and
options. These contracts reference physical natural gas prices or approximate NYMEX futures
contract prices. Contract physical prices are frequently based on prices at the Henry Hub in
Louisiana, the most common and financially liquid location of reference for financial
derivatives related to natural gas. However, natural gas supplies for our production facilities
are purchased at locations other than Henry Hub, which often creates a location basis
differential between the contract price and the physical price of natural gas. Accordingly, the
use of financial derivatives may not exactly offset the changes in the price of physical gas.
The contracts are traded in months forward and settlement dates are scheduled to coincide with
gas purchases during that future period.A swap is a contract between us and a third party to exchange cash based on a designated price.
Option contracts give the holder the right to either own or sell a futures or swap contract.
The option contracts require initial premium payments ranging from 2% to 5% of contract value.
Basis swap contracts require payments to or from us for the amount, if any, that monthly
published gas prices from the source specified in the contract differ from the prices of a
NYMEX natural gas futures during a specified period. There are no initial cash requirements
related to the swap and basis swap agreements.The following summarizes the position of open natural gas derivative contracts at March 31,
2008, December 31, 2007 and March 31, 2007:
 Other
    
    
    AccruedCurrent
    
    
    Current
    
    
    Net(in thousands)
    
    Assets
    
    
    Liabilities
    
    
    Asset (Liability)March 31, 2008
    
    $
    15,148
    
    
    $
    (567
    )
    
    $
    14,581December 31, 2007
    
    $
    3,101
    
    
    $
    (7,959
    )
    
    $
    (4,858
    )March 31, 2007
    
    $
    4,052
    
    
    $
    (2,434
    )
    
    $
    1,618
 Certain derivatives outstanding at March 31, 2008 and 2007, which settled during April 2008 and
2007, respectively, are included in the position of open natural gas derivatives in the table
above. The April 2008 derivatives settled for an approximate $4.8 million gain as compared to
the April
2007 derivatives which settled for an approximate $0.4 million loss. All open derivatives will
settle during the next 12 months.
  11




---



##### Table of Contents



We determined that certain derivative contracts were ineffective hedges for accounting purposes
and recorded a credit of $0.1 million and $1.6 million to cost of sales for the three-month
periods ending March 31, 2008 and 2007, respectively.The effective portion of gains and losses on settlement of these contracts that qualify for
hedge treatment are carried as accumulated other comprehensive income (loss) and are credited
or charged to cost of sales in the month in which the hedged transaction settles. Gains and
losses on the contracts that do not qualify for hedge treatment are credited or charged to cost
of sales based on the positions fair value. The risk and reward of outstanding natural gas
positions are directly related to increases or decreases in natural gas prices in relation to
the underlying NYMEX natural gas contract prices.The activity related to accumulated other comprehensive income (loss) for the three-month
periods ended March 31, 2008 and 2007 is:
 (in thousands)
    
    2008
    
    
    2007Beginning accumulated loss
    
    $
    (4,699
    )
    
    $
    (6,179
    )Reclassification into earnings
    
    
    (2,503
    )
    
    
    36Net change associated with current period hedging transactions
    
    
    21,653
    
    
    
    6,156Ending accumulated income
    
    $
    14,451
    
    
    $
    13
 Approximately $14.5 million of the net accumulated gain at March 31, 2008 will be reclassified
into earnings during the next twelve months.At times, we also use forward derivative instruments to fix or set floor prices for a portion
of our nitrogen sales volumes. At March 31, 2008, we had no open contracts covering nitrogen
solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment
due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts
are marked-to-market and unrealized gains or losses are reflected in revenue in the statement
of operations. For the three-month period ending March 31, 2008, there were no gains or losses
on nitrogen forward derivative instruments. For the three-month period ending March 31, 2007,
we recognized a loss of $0.9 million on nitrogen forward derivative instruments.6.
    
    Fair Value MeasurementsOn January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements(SFAS 157), which, among
other things, requires enhanced disclosure assets and liabilities measured and reported at fair
value. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB
Statement No. 157,which delayed for one year the applicability of SFAS 157s fair-value
measurements to certain nonfinancial assets and liabilities. We adopted SFAS 157 in 2008,
except as it applies to those nonfinancial assets and liabilities affected by the one-year
delay. The adoption of SFAS 157 did not have a material impact on our financial statements.
SFAS 157 establishes a
hierarchal disclosure framework that prioritizes and ranks the level of market price
observability used in measuring assets and liabilities at fair value. Market price
observability is impacted by a number of factors, including the type of asset or liability and
their characteristics. Assets and liabilities with readily available active quoted prices or
for which fair value can be measured from actively quoted prices generally will have a higher
degree of market price observability and a lesser degree of judgment used in measuring fair
value.
  12




---



##### Table of Contents



The three levels are defined as follows:
 
    
    Level 1  inputs to the valuation methodology are unadjusted quoted prices for
identical assets or liabilities in active markets.
    
    Level 2  inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the
financial instrument.
    
    Level 3  inputs to the valuation methodology are observable and significant to the
fair value measurement.
 We evaluated our assets and liabilities to determine which items should be disclosed according
to SFAS 157. We currently measure our derivative contracts on a recurring basis at fair value.
The inputs included in the fair value measurement of our derivative contracts use adjusted
quoted prices from an active market which are classified at level 2 as a significant other
observable input in the disclosure hierarchy framework.The following table summarizes the valuation of our assets and liabilities in accordance with
SFAS 157 fair value hierarchy levels as of March 31, 2008:
 Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsDerivative contracts
    
    $
    3⁄4
    
    
    $
    15,148
    
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    15,148
    
    
    $
    3⁄4LiabilitiesDerivative contracts
    
    $
    3⁄4
    
    
    $
    567
    
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    567
    
    
    $
    3⁄4
 7.
    
    Revolving Credit FacilityWe have a $50.0 million revolving credit facility available that expires January 31, 2012. The
revolving credit facility bears interest at a variable rate plus a margin (London Interbank
Offer Rate (LIBOR) plus 175 basis points, or 4.46% at March 31, 2008). Under the credit
facility, we may borrow an amount generally based on eligible cash balances, 85% of eligible
accounts receivable and 60% of eligible finished goods inventory, less outstanding letters of
credit. Our borrowings under the credit facility are secured by substantially all of our
working capital. The agreement also
requires us to adhere to certain limitations on additional debt, capital expenditures,
acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness,
changes in lines of business and transactions with affiliates. At March 31, 2008, we had $50.0
million of borrowing availability and there were no outstanding borrowings or letters of credit
under the facility.
  13




---



##### Table of Contents



8.
    
    New Accounting PronouncementsIn December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) 141R, Business Combination,which changes how business acquisitions
are accounted. SFAS 141R requires the acquiring entity in a business combination to recognize
all (and only) the assets acquired and liabilities assumed in the transaction and establishes
the acquisition-date fair value as the measurement objective for all assets acquired and
liabilities assumed in a business combination. Certain provisions of this Standard will, among
other things, impact the determination of acquisition-date fair value of consideration paid in
a business combination (including contingent consideration); exclude transaction costs from
acquisition accounting; and change accounting practices for acquired contingencies,
acquisition-related restructuring costs, in-process research and development, indemnification
assets, and tax benefits. SFAS 141R is effective for business combinations and adjustments to
an acquired entitys deferred tax asset and liability balances occurring after December 31,
2008. We are currently evaluating the future impacts and disclosures of SFAS 141R.In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements,an amendment of ARB No. 51, (SFAS 160). SFAS 160 improves the comparability and
transparency of financial statements when reporting minority interest. Entities with a
noncontrolling interest will be required to clearly identify and present the ownership interest
in the consolidated statement of financial position within equity, but separate from the
parents equity. The amount of consolidated net income attributable to the parent and to the
noncontrolling interest will be identified and presented on the face of the consolidated
statement of income. The statement offers further guidance on changes in ownership interest,
deconsolidation, and required disclosures. The statement is effective for fiscal years and
interim periods within those fiscal years beginning January 1, 2009. We are currently assessing
the impact SFAS 160 may have on our financial statements.In March 2008 the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities(SFAS 161). SFAS 161 is an amendment of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities(SFAS 133). To address concerns that the existing
disclosure requirements of SFAS 133 do not provide adequate information, this Statement
requires enhanced disclosures about an entitys derivative and hedging activities and thereby
improves the transparency of financial reporting. This statement shall be effective for
financial statements issued for fiscal years and interim periods beginning after November 15,
2008. We are currently evaluating the future impacts and disclosures of SFAS 161.The FASB has issued Draft Abstract Emerging Issues Task Force (EITF) Issue 07-4, Application of
the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships(EITF 07-4).
EITF 07-4 specifies the treatment of earnings per unit calculations when incentive distribution
rights exist. The issue shall be effective for financial statements issued for fiscal years
and interim
periods within those fiscal years beginning January 1, 2009. We are currently assessing the
impact EITF 07-4 may have on our financial statements.
  14




---



##### Table of Contents



ITEM 2.

    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Introduction
    Dependence on Terra Industries
   15




---



##### Table of Contents



Three months ended March 31, 2008 compared with
three months ended March 31, 2007
  2008
    
    
    2007Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)2
    
    
    (000 tons)
    
    
    ($/ton)2Ammonia
    
    
    38
    
    
    $
    519
    
    
    
    69
    
    
    $
    356UAN (32% basis)1
    
    
    502
    
    
    $
    281
    
    
    
    502
    
    
    $
    182
 1.
    
    The nitrogen content of UAN is 32% by weight.2.
    
    After deducting outbound freight costs.   Capital resources and liquidity
      16




---



##### Table of Contents



17




---



##### Table of Contents



Income and Distribution AllocationClass BTarget
    
    
    Target
    
    
    Common
    
    
    Common
    
    
    GeneralLimit
    
    
    Increment
    
    
    Units
    
    
    Units
    
    
    Partner
    
    
    TotalMinimum Quarterly Distribution
    
    $
    0.605
    
    
    
    0.605
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %First Target
    
    
    0.715
    
    
    
    0.110
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %Second Target
    
    
    0.825
    
    
    
    0.110
    
    
    
    85.859
    %
    
    
    0.985
    %
    
    
    13.156
    %
    
    
    100.000
    %Third Target
    
    
    1.045
    
    
    
    0.220
    
    
    
    75.758
    %
    
    
    0.985
    %
    
    
    23.257
    %
    
    
    100.000
    %Final Target and Beyond
    
    $
    1.045
    
    
    
    3⁄4
    
    
    
    50.505
    %
    
    
    0.985
    %
    
    
    48.510
    %
    
    
    100.000
    %
      18




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
    19




---



##### Table of Contents



FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
   
    
    changes in financial markets,
    
    general economic conditions within the agricultural industry,
    
    competitive factors and price changes (principally, sales prices of nitrogen products
and natural gas costs),
    
    changes in product mix,
    
    changes in the seasonality of demand patterns,
    
    changes in weather conditions,
    
    changes in environmental and other government regulations,
    
    changes in agricultural regulations, and
    
    other risks detailed in the section entitled Risk Factors.
 Business Managements Discussion and Analysis of Financial Condition and Results of
Operations Notes to our Consolidated Financial Statements
  20




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
   21




---



##### Table of Contents



ITEM 6. EXHIBITS
 (a) Exhibits:
 Exhibits 31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibits 31.2
    
    Certification of the Vice President and Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002Exhibit 32
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  22




---



##### Table of Contents



SIGNATURE
  TERRA NITROGEN COMPANY, L.P.By:
    
    TERRA NITROGEN GP INC.as General PartnerBy:
    
    /s/ DANIEL D. GREENWELL

Daniel D. GreenwellVice President andChief Accounting Officer(Principal Financial Officer)
   23